NFRA Warns of High Fraud Risks in Revenue Recognition, Urges Improved Audit Practices, ETCFO
The National Financial Reporting Authority has highlighted that revenue recognition remains the highest-risk area for material misstatement in Indian audits. The staff series document, Risk and Response Memorandum: ROMM Assessment at Assertion Level for Revenue: A Sample Document, provides auditors with detailed guidance on identifying, assessing, and responding to revenue-related risks under the Standards on Auditing.
Risk assessment lays the foundation for overall audit approach. The quality of auditor’s risk identification and assessment process has a pervasive effect on all aspects of the auditThe memorandum states
It also notes that management pressure to meet revenue targets may provide opportunities to manipulate revenue recognition, making assertion-level analysis essential for audit planning and substantive testing.
Assertion-Level Risk for Revenue Classified as SignificantAccording to NFRA, revenue misstatement risk is particularly high due to complex pricing, volume-based discounts, rebates, period-end cut-off adjustments, and inherent management bias. The report classifies the overall risk of material misstatement for revenue from products sold as significant.
“Based on above analysis, overall ROMM for revenue from sale of products is ‘Significant’,” the memorandum states.
The document further clarifies that fraud risk is presumed under SA 240 unless auditors can rebut it effectively.
There are pressures on the management to meet revenue targets and this may provide opportunities for the management to manipulate the revenue recognitionNFRA document said.
Auditors are instructed to pay particular attention to period-end transactions, incentive-linked adjustments, and cut-off issues, which remain vulnerable to manipulation.Controls and Substantive Procedures Key to Mitigating Risk
The NFRA document outlines practical guidance for auditors to address revenue risk. It recommends measures such as restricting access to sales order creation and customer master data, implementing system controls to prevent invoice creation without valid orders, and conducting periodic cut-off reviews to reconcile logistics and sales data.
Regarding substantive testing, Professional skepticism and auditor judgment are essential; effective risk assessment cannot rely solely on mechanical checklists but requires deep understanding of client processes and risksthe report notes.
It also suggests customer confirmations for revenue, detailed examination of year-end invoices, and reconciliation of sales returns and provisions as part of rigorous audit procedures.Fraud Risk Assessment Must Be Assertion-Level FocusedNFRA stresses that assertion-level analysis is critical for identifying fraud risk at both financial statement and assertion levels.
The auditor shall relate the identified risks to what can go wrong at the assertion level. Para 26 of SA 240 requires the auditor to identify and assess the ROMM due to fraud at financial statement level and at assertion levelThe memorandum states
It highlights scenarios where manipulation is more likely, including cut-off errors, incentive schemes, and complex pricing structures, directing auditors to design audit procedures that address these high-risk areas comprehensively.
Training and Awareness with Practical Implications
While intended as a training and awareness document, the memorandum carries direct implications for audit practice. Firms incorporating assertion-level insights can improve fraud detection, ensure compliance with SA 315 and SA 240, and strengthen audit quality.
The report states, “This document is intended purely towards promotion of awareness of auditing and accounting standards and audit quality as part of NFRA’s education, training, seminar and advocacy initiatives.”
It further clarifies that while the examples in the report are illustrative, the underlying principles apply broadly, making rigorous assertion-level analysis, controls testing, and substantive procedures critical for revenue audits.
Revenue Recognition Remains a Central Audit Focus
Revenue continues to account for the majority of adjustments and restatements in Indian audits. NFRA highlights that failing to evaluate cut-offs, incentive-linked revenue items, complex pricing arrangements, and management pressures can result in material misstatements, undetected fraud, and compromised investor trust.
Revenue is the single most vulnerable area in audits, and careful documentation, rigorous procedures, and professional judgment are critical to protecting investor confidence and ensuring financial statement reliabilityThe report concludes
NFRA urges auditors to adopt integrated approaches combining controls testing, substantive checks, and skepticism-driven assessment to reinforce the reliability of financial statements. Revenue recognition will remain a central focus of audit quality initiatives, and auditors who neglect assertion-level risks or rely solely on routine procedures may fail to detect misstatements or fraud.
